The Next Moody's? Orchard Platform Is A Guide To The Exploding Peer-To-Peer Lending Industry

Twice a day, at 8 a.m. and 4 p.m. Pacific time,
Prosper Marketplace, an online service that connects small borrowers and lenders, posts a list of prospective loans for funding. That list is eagerly awaited by hedge funds and other institutions interested in making unsecured consumer loans at rates up to 32%. All the loans are snapped up within seconds.

That doesn’t leave much time for investors to look carefully for the ones that meet their risk and yield criteria. Which is where New York startup Orchard Platform comes in. Orchard builds software that buys loans and crunches all the data available from Prosper and other online loan marketplaces to analyze the performance of those loans over time. Today the company bids on loans for clients on three of the roughly two dozen U.S. online loan marketplaces and captures data from another seven.

Cofounder Matt Burton, 30, a smooth-speaking San Antonio native, got the idea during a trip to the West Coast in 2013. Burton, then a fledgling consultant, made a tour of small money managers, hoping one would have a good system for tracking portfolios of small loans. They didn’t. “All of these guys tried to do it on their own,” Burton says. “On the flight back I decided I wanted to start Orchard.”

Since then 42-employee Orchard has become the largest of several startups providing analytics to the marketplace lending industry. According to
Morgan Stanley, the volume of loans made by online matchmakers last year totaled $14 billion and will grow by a compound annual rate of 47% through 2020. Orchard typically -charges clients about three basis points monthly against the amount invested by or managed through the company. In July the company’s 59 clients made $227 million in loans using Orchard. Last fall Orchard, expected to have 2015 revenue of about $3 million, raised $12 million in a round of financing, which valued the company at $50 million. Backers include Vikram Pandit, former CEO of
Citigroup; John Mack, late of Morgan Stanley; and Capital One founder Nigel Morris.

Charles Moldow of venture firm Foundation Capital, who has made millions of dollars of equity investments in marketplace lenders, says, “It’s a really valuable idea, because otherwise institutions have to do all the work themselves to figure out how to equate a loan from one platform with a loan from another platform. It’s like a rating agency.”

Orchard began in 2011 when Burton was developing products for Admeld, a company that used technology to match online publishers with ad buyers. Admeld was preparing to be sold to
Google, and Burton had time to kill. When he discovered Lending Club, with its vast listings of loans, “it looked so familiar, like a lot of the early advertising platforms.” Burton was fascinated by the reams of information Lending Club published about its loans, although “I didn’t understand what most of it meant.” Eventually he funded a few loans.

In June 2012 he met Angela Ceresnie, now 33, a vice president for risk management for small-loan underwriting at Citibank, when the two shared a rental on Fire Island with mutual friends. Ceresnie is reserved where Burton is gregarious, but they both like to win. Their business partnership started to form after a round of the card-matching game Set. Burton won. “Later on,” he recalls, “it came up that both of us were in Lending Club loans. She pulled up her portfolio, and I pulled up mine.”

“The returns I was getting were really high,” Ceresnie says. “I think they were 15 or 16%. Matt was getting 9 or 10.”

Ceresnie began tutoring Burton in underwriting. The pair started blogging about marketplace lending, and in 2013 they began hosting meet-ups for people in the industry. “Everybody was telling us that we needed to be a hedge fund,” says Burton. “I was not sold on that, mainly because I never worked at a hedge fund.” Instead, they started consulting for money managers tantalized by the possible returns available online. “They were afraid of having to keep track of a $100 million investment made in $8,000 increments,” says Burton. After his trip to the West Coast, Burton says, “I said to Angela, ‘We have the skill set to do that ourselves.’ ” With two other cofounders—Jonathan Kelfer, a software engineer from Google, and David Snitkof, a former senior vice president for small business and commercial banking at Citibank—an Orchard was planted.

Jay Posner, managing partner of client Blue Cub Capital Management, says Orchard “levels the playing field. The ability to buy loans milliseconds after they’re made available allows me to compete with larger funds that have more resources.”

“Orchard has been really, really good” at buying loans, says Aaron Vermut, chief executive at Prosper, whose president, Ron Suber, has an equity stake in Orchard. “They’re fast, they screen well, and they get a high win rate on their bids.”

Burton admits his ambitious agenda for Orchard, including developing a secondary market for online loans, faces obstacles. “It’s a very promising industry, but today there’s just a lot of friction,” he says. One source of friction is the marketplace lenders themselves; most are still too small to build the automated distribution system Burton envisions.

There is, however, no shortage of enthusiasm about the industry at the gatherings Orchard still hosts every few weeks in New York City and elsewhere. “Our first meet-up was seven people in a bar on the Lower East Side,” Ceresnie says. One evening this winter she had to shout to be heard in a San Francisco loft: “Look at this room! There are people who flew to San Francisco to come to this event! I come here, and I’m overwhelmed!”